Dynamic
Discounting
Dominion Resources Services, Inc.
Overview
Dynamic Discounting
What is it?
A Dynamic Discount is a type of early payment discount, but it differs
from a traditional discount in the following ways:
•
Traditional discounts are taken
only if payment is made by a
specified day (Pass/Fail).
•
Dynamic discounts are based on
the day of payment and use a
sliding scale.
•
When traditional discount dates cannot be met, the payment is
scheduled for the end of the net term. With dynamic discounting, it is
always paid as soon as possible.
Opportunity
Traditional Payment Terms
Net Payment Term: NET 30
•
•
3.0%
2.0%
No early payment discounts are captured
Suppliers are paid NET on the 30th day,
even if the invoice is approved earlier
1.0%
0.0%
0
10
20
30
Discount Payment Term: 2% 10, NET 30
3.0%
•
2.0%
•
$
1.0%
•
0.0%
0
10
20
30
•
Discounts are captured if paid by X days
i.e. day 10
No Discount captured if approved after
the discount due date i.e. day 10
If approved on day 5, it waits to day 10 to
pay
If approved on day 15, it waits to day 30
to pay
3
Dynamic Payment Terms
•
Invoices are paid as soon as they are approved in return for
a pro-rated, sliding scale discount.
•
Discount rate is calculated on a sliding scale according to the
approval day.
Example of 2% 1 Net 30 – ASAA
3.0%
2.0%
1.4% Discount on
1.0%
8th
•
If approval happens on day 8,
discount is approx: 1.4%
•
If approval happens on day
16, discount taken is lower
Day
0.9% Discount on 16th Day
0.0%
0
8
10
16
20
30
4
Dynamic Payment Terms
Supplier Benefits
•
Allow supplier to get paid sooner
•
Reduce DSO (Days Sales Outstanding)
•
•
•
Measurement used in determining the effectiveness of a company’s AR
program
•
Improves Cash Flow
•
Allows companies to reinvest their cash earlier
Access to cash as alternative to other financing:
•
Credit lines and/or credit cards
•
Factoring receivables
•
Asset-based lending
A fairer alternative to traditional discounts
•
Suppliers may be skeptical of discounts because many companies will
take the traditional discounts without regard to payment timing. With
dynamic discounting, suppliers can be assured that discounts will be
based on the actual timing of the payment.
5
Payment Term Consolidation Plan
Objectives:
•
Align Dominion’s payment terms with industry standards
•
Consolidate the number of payment term options currently offered
to suppliers and provide a subset of new standard terms
•
Offer a fair “Win-Win” payment term – invoices paid as soon as
approved in return for a pro-rated, sliding scale discount.
•
Provide suppliers with an alternative to credit cards and bank loans
as a source of credit
•
Capture Discounts in return for paying suppliers early
Strategy:
•
2% 1 NET 30, As Soon As Approved (Dynamic Term) will be
offered as our standard payment term to all procurement suppliers
•
Communication to suppliers is occurring during June, 2012
6